High-yield bond issuers seeking more offshore funding
Net domestic issuance by non-financial firms in May plunged to its lowest level since January 2014.
China’s high-yield bond issuers have shrugged off their previous preference for the domestic market, and are looking for funding channels both on and offshore, as fears of renminbi depreciation recede and market volatility continues.
Last year eased restrictions on developers to sell bonds onshore, falling interest rates, and a stronger US dollar lured developers back home.
The result has been fewer US dollar bonds from Chinese issuers, especially by cash-hungry homebuilders, who once predominantly relied on dollar debt.
Chinese issuers raised US$19.2 billion of debt in May, the highest level since November 2014, after a high volume of $13.3 billion in April, according to figures from Dealogic.
While offshore issuance is steadily recovering, onshore issuance has fallen.
Net issuance (new issuance, minus bonds becoming due) in the local market by non-financial firms fell to 5.87 billion yuan (HKD 6.92 billion) in May, a plunge from 202.6 billion yuan in April, and the lowest level since January 2014, according to Bloomberg data.
In April, local issuers cancelled 61.9 billion yuan of bond sales, as several high-profile defaults disrupted the market, causing a major sell off which pushed up funding costs.
“As it is more difficult to gain access to the onshore market, we are likely to see increasing offshore issuance by those who are less certain about access to the domestic market,” said Mark Follett, head of debt capital markets in North Asia at JP Morgan.
“Even funding is still cheaper onshore, and many high-yield issuers started to think, ‘because access to onshore markets can be closed quickly, and if I can’t refinance liability, I’ll put my business at risk’,” said Follett.
“Many now want to retain their access in both (markets), with the thinking, ‘I want to keep my offshore investor base with those who are familiar with my credit’.
“If firms become too dependent on either market, if something goes wrong, they think it would be difficult to re-establish themselves offshore,” he said.
Samantha Xie, executive director and head of debt capital markets in China at JP Morgan, said this is a huge reverse from 12 months ago, when high-yield issuers, mostly developers, almost “abandoned” the offshore market.
Now issuers who were planning to raise debt wholly onshore, she said, are shifting to offshore, even though it is more expensive.
“They start to look at the issue not purely from a cost perspective. Compared to the domestic market, they also feel the offshore market is more stable, and more linked to macro indicators,” she said.
Dim Sum bonds, or offshore-denominated yuan bonds, have been hit hard by the rapid growth of the Panda bond market, and by renminbi depreciation.
Some are even wondering whether Panda bonds, Chinese yuan-denominated products from non-Chinese issuers, could now eclipse Dim Sum notes as an avenue for yuan fundraising.
But Xie said that’s too early a call, as the Panda bond market still has inherent hurdles, including different accounting standards in the mainland, and strict regulations on the use of proceeds.
“If it proves longer for foreign issuers to access the Panda bond market, or execution difficulties persist, Dim Sum bonds will continue to be a viable alternative,” she said.
This article has been amended to say that Mark Follett is JP Morgan’s head of debt capital markets in North Asia, rather than Asia